It’s now a sea of green in the US equity markets in reaction to the Fed leaving rates on hold this morning, leaving the Fed funds rate at 0.25-0.50%, as nearly universally expected.  The USD is softer, the Bloomberg spot dollar index down 0.66%, already falling into the Fed announcement.  The AUD/USD sits near the top of the major FX pile this morning, trading at 0.7626, up 0.93%.  It’s been outflanked by a resurgent yen, USD/JPY back down to 100.41, the yen up over 1% after yesterday’s BoJ meeting.  Commodities are stronger, given a boost from a softer USD, WTI up 3.47% to $45.58 and Gold by 1.48% to $1,337.80.

The Dow closed up 0.9%; 2y US Treasury yields are little changed (-0.4bps) reflecting a modest rally at the very front end and somewhat higher yields thereafter.  US 10s are down 3½ basis points after another cut to the expected long run Fed Funds rate from FOMC members from 3% to a median of 2¾% within a range of 2½-3¾%, indicative of how the Fed is splitting and grappling with what the new normal and the neutral Fed funds rate might look like.

The vote was split 7-3.  All Fed Governors and Fed Presidents Dudley and Bullard voted to hold while Fed Presidents George, Mester, and Rosengren dissented, preferring to raise rates now.  The median expectation of all FOMC members (including those that don’t get a vote this year) is that there will be one hike this year and another two hikes next year, still more hawkish than current market pricing that has only 1½ total hikes between now and then.

There were downward revisions to the median Fed Funds forecasts for 2017 and 2018 each by 0.5%, next year to 1.125% (1-1¼% range) and for 2018 to a new mid-range forecast of 1.875%.  She also said in her press conference that the current stance is only moderately accommodative, so any small increases are needed to get to the new neutral rate (that’s been officially trimmed again).

Fed Chair Yellen at her press conference rate acknowledged the case was stronger for an increase in the target rate at this meeting but that it was reasonable to wait to see more progress towards its objective.  All code for data dependence but none to hidden pointing to a rate rise coming down the pipe.

Where to from here?  She would not be specific on dates, but it seems she is setting the market up for the likelihood of a December hike, subject to a still growing economy, stable markets and overseas developments.

Finally, just announced this morning, the RBNZ has left its Official Cash Rate on hold at 2.00% but signalled that “further easing will be required”, signalling that a rate cut in November is very much on the table.  Muted Kiwi reaction so far.

Also released overnight, the OECD released an interim set of forecasts, with the more notable change being to cut its 2017 UK forecast to 1%, down from its 2% June forecast.

Coming up

First, a big deep breath is advisable.

But if you thought that was it for central banks, think again.  Newly-minted RBA Governor Philip Lowe is appearing before the House of Representatives Economics Committee this morning at 10am.  There will be plenty of opportunity for MP Committee members to ask questions about RBA policy, perhaps the new/refreshed inflation target agreement between the Bank and the Treasurer, or even the RBA’s thinking on central bank negative interest rate policy that the Bank of Japan seems to be stepping back from that now.

That’s pretty much it for the local time zone, though there’s more coming from central bankers overnight.  ECB President Draghi is speaking at a conference in Frankfurt tonight ahead of BoE Governor Carney, also speaking in Germany, in Berlin.

It’s rather light on the data front tonight with US Jobless Claims the likely pick for markets tonight along with the UK CBI Trends Survey for another update on UK post-Brexit poll confidence and activity from orders and prices.  For completeness, there’s the Chicago Fed National Activity Index, US Existing Home Sales, the Leading Index and the Kansas City Fed manufacturing index.  Pretty much second tier for that group.

Overnight

On global stock markets, the S&P 500 was +1.09%. Bond markets saw US 10-years -3.46bp to 1.65%. In commodities, Brent crude oil +2.59% to $47.07, gold+1.4% to $1,337, iron ore +0.2% to $55.87. AUD is at 0.7632 and the range since yesterday 5pm Sydney time is 0.7569 to 0.7626.

Also enclosed is our fuller wrap of the Fed decision.

Good luck.

For full analysis, download report:

• Markets Today:  22 September 2016 (PDF, 80kb)
• US Economic Comment (PDF, 670kb)

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